Stuck at a red light
- 1H22 results missed expectations as TCM slipped into a wider core net loss in 2Q22 due to higher-than-expected tax expense in the quarter.
- We widen FY22F LPS and expect TCM to stay in the red in FY22F due to inflationary cost pressures and negative impact from ringgit depreciation.
- Retain our Reduce rating with a lower RM0.98 TP.
Sequentially stronger sales in 2Q22
Tan Chong Motor Holdings’ (TCM) revenue grew by 5.8% qoq to RM814m in 2Q22 due to higher sales contribution from Malaysia and Vietnam. Nissan’s sales volume in Malaysia rose 6% qoq from 3,766 units in 1Q22 to 4,099 units in 2Q22, mainly due to a rush for vehicle deliveries ahead of the sales and services tax (SST) exemption expiry after 30 Jun TCM registered headline net profit of RM6.2m in 2Q22 against RM19.5m net loss in 1Q22. The group attributed the higher profitability in 2Q22 to 1) favourable sales mix, and 2) higher net forex gain. Stripping out the exceptional items, TCM posted a wider RM14m core net loss in 2Q22 against RM7.9m core net loss in 1Q22.
Narrowing losses in 1H22
Revenue in 1H22 surged 28.6% yoy to RM1.6bn, mainly due to higher sales volume in Malaysia. Nissan’s sales volume in Malaysia rose 35% yoy to 7,775 units in 1H22 on the back of robust demand for popular models such as the Almera Turbo and Navara pick-up truck. 1H22 EBITDA grew 21.1% yoy to RM93m, mainly due to a better sales mix for its Malaysia operations. Overall, the group registered a narrower core net loss of RM21.9m in 1H22 against RM31.7m in 1H21.
New launches to drive sales volume in 2H22F
The group launched the Nissan Serena S-Hybrid in Jul 22 and received encouraging response from the market. Moreover, the group highlighted that it continues to see decent booking registrations even after the SST exemption ended due to value propositions and higher specs offered. In the meantime, the group will focus on fulfilling the outstanding order backlog received prior to 30 Jun 2022. Moreover, TCM highlighted that demand for MG cars in Vietnam remains strong, mainly driven by the new MG5 sedan and popular Bsegment SUV MG ZS. Despite the favourable sales outlook in 2H22F, we see minimal earnings improvement due to potential margin contraction from inflationary pressure and negative impact from depreciation in ringgit against US$.
Retain Reduce with a lower RM0.98 TP
We widen our FY24F LPS to account for higher tax expense. Retain Reduce with a lower RM0.98 TP, still based on 0.23x CY23F P/BV, 1.5 s.d. below its 3-year mean. We see stronger earnings from overseas operations and appreciation of the ringgit vs. US$ as potential upside risks to our Reduce call, while widening losses in its overseas operations and depreciation in ringgit vs. US$ are key de-rating catalysts for the stock.